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The effect of tax-motivated income shifting on information asymmetry

Author

Listed:
  • Ciao-Wei Chen

    (University of Illinois at Urbana-Champaign)

  • Bradford F. Hepfer

    (Texas A&M University)

  • Phillip J. Quinn

    (University of Washington)

  • Ryan J. Wilson

    (Lundquist College of Business, University of Oregon)

Abstract

We examine whether tax-motivated income shifting by U.S. multinational corporations affects information asymmetry. Using a new firm-year measure of income shifting and a two-stage least squares approach, we find income shifting is positively associated with four measures of information asymmetry. Cross-sectional tests reveal that this effect is more pronounced for firms with large differences between foreign and domestic earnings growth. Using SFAS 131 to improve identification and establish evidence consistent with a causal relation between income shifting and information asymmetry, we demonstrate that the adverse impact of income shifting on information asymmetry is concentrated in firms that discontinue geographic earnings disclosures. Overall, our study provides evidence that significant consequences of information asymmetry are associated with tax-motivated income shifting.

Suggested Citation

  • Ciao-Wei Chen & Bradford F. Hepfer & Phillip J. Quinn & Ryan J. Wilson, 2018. "The effect of tax-motivated income shifting on information asymmetry," Review of Accounting Studies, Springer, vol. 23(3), pages 958-1004, September.
    • Handle: RePEc:spr:reaccs:v:23:y:2018:i:3:d:10.1007_s11142-018-9439-1
    DOI: 10.1007/s11142-018-9439-1
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    More about this item

    Keywords

    Tax-motivated income shifting; Information asymmetry; Bid-ask spreads; Segment reporting; Tax havens;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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